DP8543 What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?

Author(s): Sebnem Kalemli-Ozcan, Herman Kamil, Carolina Villegas-Sanchez
Publication Date: August 2011
Keyword(s): bank lending, exports, foreign ownership, growth, short-term dollar debt, twin crisis
JEL(s): E32, F15, F36, O16
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8543

We provide evidence on the real effects of credit supply shocks utilizing a new firm-level database from six Latin American countries between 1990 to 2005. Holding creditworthiness constant through foreign currency debt exposure, we compare investment undertaken by domestic exporters to that of foreign-owned exporters, where the latter's exposure to the liquidity shock is lower. We find that foreign-owned exporters increase investment by 15 percentage points relative to domestic exporters only when the currency crisis occurs simultaneously with a banking crisis. These findings suggest that the key factor hindering investment during financial crises is the decline in credit supply.